Would a sudden shift in investment expenditures or government expenditures do more harm then good?

Question

Here is a paper I wrote that uses theoretical AD-AS models that are split up into two parts of the economy- government expenditures, and private expenditures.
https://econteenblog.wordpress.com/2019/03/31/the-harmful-economic-effects-of-a-change-in-investment-or-government-expenditures/

I am curious to see if despite the constant arguments between both parties that there should be an increase in the private industry or in the government, that actually a sudden shift one way or the other would be harmful, causing both demand pull inflation and reduced output.

Answer 1

We have to take into account that private business usually are more competitive than bureaucratic ones. So productivity is higher in every branch of economic activity but the ones in which the public good is necessary to be ensured by the colectivity (i. e. Police or National Security) Anyway, the government has the duty of protecting his population from the malfunction of liberal markets (i. e. Unemployment Insurance or Worker Rights).

Regarding your paperwork, In my opinion public and private investment are similar. They create consumption through jobs and profits in companies through expenditure. Anyway, there are cases when the public investment crowd out private investment in more productive economic targets because it absorbs private wealth that could be invested with other purposes. There can be a gdp growth due to public spending as happened in the Second World War, because a higher taxation on the workers of the country can lead to a greater effort and longer workdays in order to compensate the increase of taxes. Low taxes can be a good attraction to new or foreign companies too, so the government has to find an equilibrium and to try not to incurr in large deficits that will crowd out private consumption in the future.

I hope this helps. I'm answering all your questions because my main job is very boring and I have free time, besides I find them interesting. I hope you get the opinion of more economists. I'm sorry about my imperfect English I hope you can understand my answer easily.

Greetings.

Comments

Thank you Mr. McConnell again for your great comment!
I agree that private businesses are indeed more competitive then the government. When you are referring to crowding out, are you referring to the loanable funds market?
In my humble opinion, considering that both are similar though, I think it would make logical sense that the AD-AS model can be split up into one for investment and government spending. Thus a reallocation of money from one of those two to the other would likely cause the effects in demand pull inflation as well as reduced output in my humble opinion.
Perhaps even if one was more efficient such as the private industry, maybe the shift to it would do more harm then good, as I stated previously, because of inflation, etc.
It's nice that you have a lot of free time sir! Not all of us have that. :)
Again, your English actually sounds great!

Kind regards,
Brennan

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Yes. Really when I say crowding out I mean the extraction of resources from the private sector in general. Funds that could be invested in productive purposes or even consumption if the government is going to repay debt or make a foreign expenditure.

Regarding the decrease in GDP, in my opinion it depends on the time between the extraction of wealth and its consumption, or whether the extracted wealth from one side to another is spent in domestic markets, foreigners or even accrued without a specific purpose. The inflation effect can be caused by other reasons too. As the purpose of earning the same profit as before in a scenario of increasing taxes. I don't find a huge reason for inflation to rise very much in other cases. At first sight a switch between private expenditures and public expenditures shouldn't affect inflation but it depends on the amount of real consumption created by the public or private expenditures (i. e. Investment)

I hope to have answered clearly to your questions sir! Keep the good job!